Tax Reform: Dynamic Analysis Is Vital

Commentary By

Curtis S. Dubay, a leading expert on tax reform, income tax, corporate tax, international taxes, and the estate tax, is a research fellow in tax and economic policy at The Heritage Foundation. Read his research.

The House Ways and Means Subcommittee on Select Revenue Measures held a hearing recently about the importance of dynamic scoring of tax reform.

Tax reform is necessary to improve the potential of the economy and increase incomes and opportunities for American families. Earlier this year, chairman of the House Ways and Means Committee Dave Camp (R–MI) released a tax reform proposal that was the first major plan from the chairman of that powerful tax-writing committee in many years.

I testified at the hearing. In addition to my written testimony, my spoken testimony as prepared is below:

Good morning, Chairman Tiberi, Ranking Member Neal, and distinguished members of the committee.

My name is Curtis Dubay. I am research fellow in tax and economic policy at The Heritage Foundation. The views I express in this testimony are my own and should not be construed as representing any official position of The Heritage Foundation.

Thank you for having me here today to discuss the important issue of dynamic scoring of tax reform.

I’ve been working on tax reform for a decade, first at the Tax Foundation, then PriceWaterhouseCoopers, and for the last six years at Heritage.

In that time I’ve learned that the primary reason we badly need to overhaul the tax code is to improve the economy’s potential and increase incomes and opportunities for all American families.

Chairman Camp’s recently released tax reform proposal was a big step in the right direction for achieving tax reform in large part because it included a dynamic estimate of the plan’s impact on the economy from the [JCT]. The chairman and his staff should be applauded for securing that estimate.

Dynamic analysis is the right way to evaluate tax reform because we know tax reform improves the economy. It does so by increasing incentives for families, businesses, investors, and entrepreneurs to engage in productive activities such as working, investing, and taking risks—which are the catalysts of economic growth. And we know they all respond to incentives.

Traditional static scoring hampers tax reform’s progress because it does not measure how it strengthens the economy. It is incomplete. A tax reform plan with only a static score is like a business plan without an estimate of profitability.

There are certainly reasonable disagreements over how responsive families and businesses are when tax rates fall. They are reasons to present a range of estimates using various models and an array of elasticities that fall within the mainstream estimates from empirical academic literature—not for shunning dynamic analysis altogether.

As my colleagues in The Heritage Foundation’s Center for Data Analysis (CDA) wrote recently, “It is better for estimates of tax reform to be approximately right than precisely wrong.” Static scoring is precisely wrong.

CDA conducted a dynamic estimate of the Camp plan. They found that it would increase economic output by $92 billion per year on average over the 10-year budget window and would increase employment by 548,000 jobs per year.

CDA found these positive impacts because of the lower rates on families and businesses that the plan institutes in its first few years and the move to a territorial system.

According to CDA’s estimates, the growth effects of the Camp plan taper off the longer it is in place as policies that increase taxes on investment—and therefore increase the cost of capital—have time to go fully into effect. They include longer depreciation lives for capital and the amortization of advertising and research and development [R&D] expenses.

To reverse that downward trend and increase the Camp plan’s positive impact on growth, current depreciation schedules, at minimum, would need to be restored and advertising and R&D returned to fully deductible expenses.

Lower rates would also help make the Camp plan more pro-growth. The top rate under the plan is 38.3 percent, only 5 percentage points below where it is today.

Chairman Camp understandably chose to adhere to the flawed revenue baseline constructed by the Congressional Budget Office when making his plan revenue neutral. The revenue target it sets is too high because it assumes that Congress intends for expiring tax policies to expire permanently.

Under the reasonable assumption that Congress does not intend to raise taxes by default, Chairman Camp’s plan could raise nearly $1 trillion less and still remain revenue neutral. That money could be used to reverse the policies that raise the cost of capital and reduce the plan’s top rate significantly.

Chairman Camp’s proposal has given renewed energy to the tax reform debate. A key to maintaining that momentum is to make sure JCT continues offering dynamic estimates of tax reform and other major pieces of tax legislation.

The more JCT does dynamic estimates, the better it will become at doing them and the more opportunities outside experts will have to help JCT refine its methodology to improve its analyses even more.

Thank you again, and I look forward to your questions.

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